An equilibrium analysis of R&D decision-making in defense procurement with cost-reimbursement based on quotas under incomplete information

In defense procurement R&D investment, the fruit of R&D is greatly affected by the investment strategy profile of manufacturers. In this paper, we studies the investment equilibrium with cost-reimbursement based on quotas and analyzes the Impact of incomplete information on equilibrium of R&D decision-making. The results show that in defense procurement R&D, when R&D investment reimbursement rule is cost-reimbursement based on quotas and manufacturers´ valuation on monopoly contract of defense production is incomplete information, manufacturers´ investment equilibrium will deviate from the expected investment equilibrium of government, and what´s worse is that manufacturers may retreat from the “design contest” of defense procurement R&D. The results mean that incomplete information will affect the effect of government´s reimbursement rule, which means cost-reimbursement based on quotas can not overcome the disadvantages of proportional-reimbursement.